London

Modest Rental Growth Persists in Europe’s Office Markets

London, 24th January 2011 - Jones Lang LaSalle’s latest research reveals that modest growth persisted throughout quarter four (Q4) 2010 in Europe’s office markets with Jones Lang LaSalle’s Office Rental Index rising 0.8% over the quarter and by 5.4% over the year.

Jones Lang LaSalle’s European Office Clock also highlighted an increase in occupier activity over the quarter with take-up increasing 20% in both CEE and Western European markets; however the research also predicts that the outlook for 2011 is moderate as macro risks remain. In addition, yield compression and modest rental growth continued to drive capital values as market activity and confidence improved.

Bill Page, Head of European Office Research comments “Over 2010 the European office market performed ahead of expectations. Increasing take-up and rents coupled with decreasing supply is an outcome only the most positive were expecting – but –and there is always a but – economic risks remain and not just in those nations affected by the sovereign debt crisis. While 2011 will see continued improvement better economic fundamentals are required for sustainable traction in the leasing market.”

The economic recovery across the region in the Q4 continued at around the same level as seen in Q3, however recovery continues to be two-speed with Germany and the Nordic countries indicating the strongest growth in contrast to Ireland, Greece, Portugal and Spain, which are experiencing ongoing difficulties.

Prime rents across the region continued their modest growth with Jones Lang LaSalle’s European Office Index increasing by 0.8% over the quarter compared with 0.7% in Q3. In contrast to a year ago, office rents are now 5.4% higher after four consecutive quarters of growth. Rents remained stable in over half of the Index markets; however there were a number of notable exceptions. Rents fell in Barcelona (-2.6%), Madrid (-1.9%) and Edinburgh (-1.7%) while rents increased in seven of the Index markets. The most substantial increases were in Lyon (5.2%), Milan (4.0%) and Stockholm (2.6%) as well as the German markets of Berlin, Dusseldorf and Munich. The strong performance differential in many markets between highly sought after prime and Grade A space and less popular secondary space remains and this trend is likely to continue until economic growth gains momentum.

Office leasing volumes were boosted by activity in the final quarter of the year, with almost 3 million sq m traded, a 20% increase on Q3 and a quarterly level not seen since 2007. Take-up was driven by improvements in both Western Europe and CEE with quarterly increases of 20% in both regions. Take-up for 2010 as a whole reached 10.7 million sq m (115 million sq ft), one third more than in 2009, with 17 out of the 24 index markets showing deal volumes above their 2009 results. This was also 4% ahead of the 10- year annual average, something few expected at the start of the year. While transaction volumes are improving, occupiers remain cautious with deals still driven largely by lease events and consolidation. Caution among occupiers is expected to remain as risks remain to the recovery. Fiscal tightening threatens to undermine consumer and business confidence and has the potential to moderate demand for office space over 2011.

Net absorption was positive for the sixth successive quarter, with occupied stock across EMEA increasing by 1.2 million sq m over the quarter. This was driven largely by increases seen in Berlin, London, Paris and Moscow. The only falls in occupied stock were recorded in Frankfurt and The Hague, which both witnessed an increase in vacancy rates. The European vacancy rate began to decrease falling by 10 bps this quarter to 10.2% after being stable for six months. In Western Europe it fell slightly from 10% to reach single digits (9.8%) after having hit 10% in Q3, but remained stable at 14.4% in CEE.

Office completions were stable over the quarter with around 1.2 million sq m (12.9 million sq ft) of new stock released. This brings the total annual completions to around 5 million sq m (54 million sq ft), 32% less than in 2009 and going forward supply is expected to trend downwards across Europe in 2011. The development pipeline remains subdued and for those seeking high quality office space, choice is becoming increasingly limited across markets. Supply of poorer quality second-hand space remains high in most markets and is available at significant discounts. The dwindling availability of prime space will be further driving rental growth and stability in most markets.

Driven by broad based economic recovery in Germany and some of the Nordic markets (particularly Sweden), alongside strengthening market fundamentals, investor confidence improved in the latter half of 2010. Direct commercial real estate investments in EMEA totaled €102 bn over 2010, which represents a 45% increase on 2009. In total, 15 markets showed an increase in capital values over the quarter led by Milan, where capital values rose by 7.2% driven by a combination of rising rents and further yield compression. However, four markets did show capital values decreasing: While values fell in Budapest and Dublin due to the renewed outward yield shift, the reduction in Barcelona and Edinburgh was entirely based on the negative rental performance. With yields now expected to be much more stable in many markets, capital value growth in the short term will be driven by rental performance and out-performance will come where the occupational market prospects are best. It could be beyond 2014 before 2007 peaks are witnessed again.

Chris Staveley concluded: “Capital Values increased by almost 18% across the European office market in 2010 and we haven’t seen a return like that since 2007. Going forward we see there being much less yield compression with performance driven by rental growth. The importance of understanding local market conditions in identifying outperformance can not be overstated.”